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The next Mis-Conception: UCITs

Always be a first-rate version of yourself, instead of a second-rate version of somebody else. ~Judy Garland

The success so far of the UCITS framework (Undertakings for Collective Investment in Transferable Securities) cannot be under-estimated, with approximately €5.6 trillion raised from investor appetite and set to continue to rise. However, the risk lies once again in misleading investors and storing up the potential for disappointment further down the line. The appeal from both sides is clear – the promise of increased liquidity, transparency and regulatory oversight for investors creating enough demand to incentivise managers to set up such vehicles. But question marks have been raised over whether they can deliver and the suitability of such a structure to all the many different types of funds.

Areas of Contention

Replication: As we’ve seen recently, with the closure of BlueCrest’s Blue Trend UCITs Fund, the restrictions in place to comply with the framework do not allow a full replication of trades the offshore fund is implementing, leading to a widening tracking error and investors perplexed at why they are not getting the same returns.

Liquidity: A potential liquidity mismatch with underlying investments – even if not obvious now, to become apparent during periods of market stress. The high frequency redemption terms may not be able to be met – which would bring the very classification into repute.

Costs for Fund Managers: Compliance with the regulations involved may involve higher structural costs an concern has been raised over whether higher costs may translate into lower returns for investors

INVESTMENT INSIGHT

If you are allowed the luxury of being able to invest where you please, then it may be advisable to not become “UCITs-blinkered”. Being structurally AGNOSTIC can allow for the discovery of superior risk-adjusted returns, net of fees. Remain open to opportunities.